Thrifty Thinking: Setting Up a Savings Account for Your Kids and Relatives

Giving money to your children or young relatives can be great for their financial security. The money provides a base to begin from when they become adults and the ability to fund certain needs as they get older. With the current savings rate in the United States at 2.6 percent (first quarter of 2013), more needs to be done to encourage savings in this country. There are various vehicles available for you to fund savings for your kids or relatives. 

Purpose of a Savings Account for Kids and Relatives

There are several reasons to consider setting up a savings account for a young person. There are tax advantages to making a gift to a young child. In 2013, the maximum individual amount that can be given under the gift tax exclusion law is $14,000. This means that this amount given from one individual (donor) to another (recipient) is not taxable to the recipient and enables the donor to remove the amount from their taxable estate.

Setting up a savings account for a minor begins the process of building an asset for their future. Depending on the age of the child when the savings account is established, the benefit of compounding will help build a small deposit amount into a larger sum over time. This sum can be used to pay for college, put a down payment on a first home or purchase a car.

Types of Savings Accounts Available

There are different ways you can provide a savings account for a child. Options include (but are not limited to): Uniform Transfers to Minors Act/Uniform Gifts to Minors Act custodial accounts; joint custodial accounts; 529 savings plans and Coverdell education savings accounts.

One method is to establish a joint custodial account between yourself and the minor. Although this is permissible, typically through a bank, there are some pitfalls that come with these types of arrangements. If thinking about establishing a joint account, consult with your financial advisor for a list of options that may be more suitable, depending on the purpose.

For the purposes here we will focus on Uniform Transfers to Minors Act/Uniform Gifts to Minors Act custodial accounts.

Uniform Transfers to Minors Act/Uniform Gifts to Minors Act Accounts

These types of accounts, also known as custodial accounts, are established between an adult of relation to a minor child. Depending on the state you live in, you may have access to either a Uniform Transfers to Minors Act (UTMA) account or Uniform Gifts to Minors Act (UGMA) account. The difference between these types of accounts is slight, but the biggest is in terms of control. UTMA accounts permit the parent or adult as custodian greater control over assets held in the account than does an UGMA account, which is typically established for support purposes.

These accounts can be established through a bank or as a brokerage account with an investment banking firm. Understand that the minor child cannot legally execute any contract associated with the account until age 18, 19, 21 or up to 25 (depending on the state and account type). They may, however, have the ability to withdraw some funds for personal use. As the custodian and trustee for the account, it is your duty to instill a sense of purpose within the child for the account and establish limits on access to it.

Certainly, gifts of money that are purposeful and thoughtful can greatly benefit them for years to come. So if you’re deciding among gifts for your child or young relative, perhaps for a major accomplishment, be sure to consider setting up an account for them. This gift could have lifelong impact on a young person!

This article was provided by Mike Gordon, recent business school graduate and charitable big brother. If you’re interested in helping others set up bank accounts and manage their money, Mike suggests looking into accounting jobs with moneyjobs.com. Information can be found at moneyjobs.com.